rd80 (93.71)

Citigroup: A Lesson in Supply and Demand

7

After announcing plans to repurchase TARP preferred stock that included a capital raise and the gov't selling part of its common stake, Citigroup had to make a few changes to get the offering placed.

The price had to be reduced to $3.15, well below the roughly $4 bucks a ticket Citi was getting before the deal to buy out of TARP was announced. The gov't also postponed plans to sell its common stock and agreed not to sell any for at least 90 days.

We don't know all the behind-the-scenes details, but it's reasonable to guess that a $20+ billion dollar offering following shortly after BAC's $19 billion deal and Wells Fargo's $12 billion sale just might have been more bank stock supply than Mr. Market was ready to digest.

It's also reasonable to assume that had the government gone ahead with its sale, the price would have needed to go even lower to attract another $5 billion from the sidelines. Not to mention Uncle Sugar's conversion price was $3.25 and Sec. Geithner is probably not very interested in locking in a loss after the Citi stake was so profitable on paper for TARP just a few days ago.

Maybe this is just the market saying Citi is too risky a proposition without the gov't propping it up. Even at that, this isn't great news for PNC or any other banks that may have been considering share offers to buy their way out of TARP. If private sector money has indeed had its fill of bank stock, the next bank trying to crawl out from under TARP is likely to have problems raising the cash needed to peel back the canvas.

Any Fools get in on the $3.15 offer? I'm not a Citi fan, but even to me that looks like a decent high-risk play.

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I think a lot of people will look at Citi at $3/share and think it looks like a reasonable long term buy, especially since there is a perception that the government will never let them fail. Some might argue that it's still not priced right, but even conservative Morningstar sees their "fair value" (though "highly uncertain"at around $5-$6. I'll definitely be looking at call options way out, as I do think the stock will trade up over next year.